As the year winds down, we approach the season when some investors do an annual portfolio review. Checking in on your investments, whether annually or at some other interval of your choosing, can be quite helpful, in our view. However, we suspect doing so can also lead to the temptation to rearrange investments based on the past year’s performance, which may not be a wise long-term move. We think investors are best served to approach an evaluation by assessing whether their overall strategy is in line with their long-term goals, cash flow needs, risk tolerance and time horizon (or the length of time your assets must be invested to keep working toward your goals)—not by dwelling on which categories of shares did best and worst.
We suspect the temptation to shuffle assets based on past performance may be particularly great after 2018, which featured a rather large gap between European and global equity returns. Through November’s end, the MSCI EMU Index (European Monetary Union) was down –7.2% year to date.[i] Yet the MSCI World Index was up 4.8%, in large part because US shares were positive.[ii] This could lead investors to conclude European shares aren’t a wise investment for now and sell their eurozone holdings in favour of US shares. Similarly, investors may choose to leave low-returning sectors such as Materials and concentrate in Information Technology or Health Care, which rose 12.4% and 18.3%, respectively, year to date through November.[iii]
In our view, this mindset can lead investors astray. Past performance doesn’t dictate future returns. Equity market history shows sector and country leadership shifts often. The categories that did best one year may not do well the next. The categories that did the worst one year could improve the next. Whilst European shares are trailing American shares year to date, the opposite was true last year. As Exhibits 1 and 2 show, MSCI World Index sector and regional returns over the past 10 calendar years have inconsistent leadership.
Exhibit 1: MSCI World Index Sector Returns
Source: FactSet, as of 28/11/2018. MSCI World Index sector returns with net dividends, yearly, 31/12/2007 – 31/12/2017. The Real Estate and Communication Services sectors are excluded as they have not existed all 10 years. The best-performing sector each year is shaded green, whilst the worst-performing is shaded red.
Exhibit 2: MSCI World Index Regional Returns
Source: FactSet, as of 28/11/2018. MSCI Index returns with net dividends, yearly, 31/12/2007 – 31/12/2017. The best-performing area each year is green, whilst the worst-performing is red.
Rather than seeing year-end as a time to realign sector and country positioning based on past returns, we think investors are better served by asking a simpler and more forward-looking question: Does my portfolio still match my needs? Or, does its mix of equities, fixed interest, cash and other securities (also known as asset allocation) align with your long-term goals, ongoing cash flow needs, tolerance for risk and short-term volatility, and time horizon? If any of these factors have changed over the past year, it may be wise to discuss with your investment adviser and consider whether portfolio changes are necessary to match. After you have nailed down the right asset allocation for your needs, then we think it can be worthwhile to check your sector and country positioning—not to chase past returns, but to help you not have any heavy concentrations. Target diversification when selecting countries and sectors, not the hottest areas. Their past performance means nothing for your future returns.
Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: FactSet, as of 31/11/2018. MSCI EMU Index return with net dividends, 31/12/2017 – 30/11/2018.
[ii] Source: FactSet, as of 30/11/2018. MSCI World and MSCI USA Index returns with net dividends, 31/12/2017 – 30/11/2018.
[iii] Source: FactSet, as of 30/11/2018. MSCI World Index Information Technology and Health Care sector returns with net dividends, 31/12/2017 – 30/11/2018.